Spreading the risk

Big projects in construction – the stadiums and skyscrapers that feature regularly in the news section of Building – cost a lot to tender. Risk exposure is high and controlling costs difficult. Famously, fingers have been burned.

So, contractors will bid in alliance with others that (so legend has it) they would have competed fiercely with in the past. The prevalence of outsourced long-term maintenance contracts has had an impact on this.

In the brave new Eganistic world of open-book partnering, there is plenty of room for the contractual joint venture as a means of sharing risk. Sharing is a good thing. In joint venturing, tender costs, overheads and risks are spread between the parties. Each brings its specialist skills to the job. Everyone is happy.

Happy, that is, unless the money runs out.

If a joint venture party goes under, it will leave its fellow joint venturer, the client and its subcontractors in the lurch. The client will want the job finished. The survivor will have to ensure this happens. Subcontractors will look to the surviving joint venturer for recovery of outstanding payment. The survivor will be quick to point out that its co-venturer's liabilities are not its problem. And if it has got things right, they won't be.

The courts have examined this scenario in a number of recent cases. The position is neatly demonstrated in Spree vs O'Rourke, a case concluded five or so years ago. In such cases, the legal niceties of contracting as a joint venture come to the fore. What was (allegedly) said, by whom, where and when in meetings that seemed insignificant at the time, becomes crucial.

The legal spin on all this is twofold. Joint venture agreements will usually state that the joint venture is not a partnership. Second, although the joint venture presents itself to the client as a seamless whole – two hearts beating as one – as far as a subcontractor is concerned, the contract is with individual companies, not the joint venture. Similarly, staff of one joint venture party do not act as agents of the other and certainly not as agents of the joint venture.

The partnership issue is the trickiest. The word is used with different meanings and implications at different times. This is complicated by the use, in construction and elsewhere, of the term "partnering", which, of course, is quite different.

Your average joint venture agreement might say much about working co-operatively together in a spirit of mutual trust. This is likely to mean little in law when considering whether a partnership exists. Moreover, you cannot simply wish away partnership by provision in the joint venture agreement.

The legal and commercial essence of partnership is working together with a view to profit. What will matter is how your joint venture arrangements deal, in practice as well as on paper, with income. If the venture is one in which the participants carry on in business "with a view to profit", it is a partnership. You will be liable for your partner's dealings with third parties in the name of the partnership.

The legal and commercial essence of successful joint venturing agreements should be working together with a view to turnover. Profit is something that each member will have to take care of itself.

This basic distinction is extremely useful to bear in mind when planning a joint venture. The agreement should be drafted to ensure that there are workable arrangements for handling joint venture income. Each member's entitlement should be kept separate and calculated by reference to clearly defined criteria – contract bills are a ready-made tool for this purpose.

As examples of contractual analysis, cases such as Spree are not groundbreaking. They do, though, help clarify the difference in philosophy behind partnership and joint venturing. It also helps if the joint venture management and staff understand these basic distinctions. Once you have got that point, the rest is plain sailing.